Investing in companies with consistent dividend growth is one of the most proven and time-tested strategies for superior returns. Costco (NASDAQ:COST), CVS (NYSE:CVS), Starbucks (NASDAQ:SBUX), Tupperware (NYSE:TUP), and PetsMart (NASDAQ:PETM) are not among the most popular and recognized dividend growth names; however, they have the fundamental strength to pay growing distributions for years to come.
Costco is solid as a rock
Dividend growth investing is not only about the direct effect of dividends on investor's returns. Perhaps, more important, a company needs to be able to consistently generate growing cash flows for distributions; that's a clear sign of fundamental quality.
Costco is strong and resilient. The company makes most of its money from membership fees, not margins on prices. This allows it to charge competitively low prices for its products and keep its loyal customers happily coming back for more. Renewal rates during the last quarter were above 87% on a global basis, and more than 90% in big markets like the U.S. and Canada.
The company has raised its distributions every year since paying its first dividend in 2004, including a special distribution of $7 per share in 2012. The dividend yield is not very impressive at 1.1%, but Costco distributes only 25% of earnings as dividends. This leaves plenty of room for further dividend growth.
CVS offers healthy dividend growth
CVS has decided to stop selling tobacco, but that won't stop the company from generating smoking hot dividend growth for investors in the long term. CVS is transforming itself from a simple drugstore to an integrated health-care provider. Exchanging short-term sales for long-term growth is something that smart CEOs with a strategic vision need to be willing to do.
The company has delivered spectacular dividend growth for investors during the years: What was a quarterly payment of less than $0.029 per share in 2003 has now multiplied into $0.275. This includes a big increase of 22% announced in December of last year. The payout ratio is only 24%, and the dividend yield is 1.5%.
Hot dividend growth from Starbucks
Starbucks has a relatively young dividend history, but the company is not wasting any time when it comes to raising those payments. Starbucks has increased dividends from $0.1 per share in 2010 to $0.26 per share currently, and the payout ratio is still below 40%. The company´s dividend yield is currently around 1.4%.
More importantly, Starbucks owns a unique brand in its industry and a differentiated image, which allows the company to charge higher prices for its products and generate superior profitability for shareholders. The company has plenty of room for growth via new stores, product innovation, and new sales channels, so Starbucks is positioned to continue delivering caffeinated dividend growth for investors during the coming years.
Tupperware keeps your cash flows fresh
The direct selling industry is under a lot of scrutiny lately, but that's no reason to stay away from Tupperware at all. On the contrary, the market seems to be throwing out the baby with the bathwater, as the company has never been accused of any material wrongdoings. Yet, concerns over pyramid scheme accusations regarding other companies in the industry are hurting investors' sentiment toward direct selling companies, in general.
In addition, currency headwinds in emerging markets are affecting financial performance lately, so the stock has fallen by almost 18% year to date.
A combination of a falling stock price and a growing dividend payment have brought the dividend yield to 3.5%. This sounds like an attractive yield for a company that has more than tripled its dividends since 2010, from $0.22 quarterly to $0.68. The payout ratio is also quite safe in the area of 48%.
Pets and dividends are a powerful combination
The retail industry is facing heavy economic headwinds lately; however, PetSmart is no average retailer by any means. A high level of specialization, product variety, and unique customer service provide valuable differentiating factors protecting PetSmart in a tough environment. Besides, people simply love their pets, and PetSmart makes it easier to indulge them with all kinds of products and services. That´s a great business to be in.
Management is forecasting comparable sales growth of between 3% and 3.5% for fiscal 2013, so the company is proving its quality and resiliency in spite of tough conditions for retailers. The company has consistently increased dividends each year since 2010, including a big hike of 18% announced in September of 2013. PetSmart pays a dividend yield of 1.2%, and the payout ratio of 17% leaves plenty of upside room in the coming years.
These five companies are not among the most renowned dividend names. They don´t have huge yields or spectacular track records of more than 100 years paying recurrent dividends like the most popular dividend stocks. On the other hand, they have the fundamental quality to reward investors with materially growing capital distributions in the long term, and that makes them solid candidates for a dividend growth portfolio.
Nine great dividend stocks
One of the dirty secrets that few finance professionals will openly admit is the fact that dividend stocks, as a group, handily outperform their non-dividend paying brethren. The reasons for this are too numerous to list here, but you can rest assured that it's true. However, knowing this is only half the battle. The other half is identifying which dividend stocks, in particular, are the best. With this in mind, our top analysts put together a free list of nine high-yielding stocks that should be in every income investor's portfolio. To learn the identity of these stocks instantly and for free, all you have to do is click here now.
Andrés Cardenal has no position in any stocks mentioned. The Motley Fool recommends Costco Wholesale, CVS Caremark, PetSmart, and Starbucks. The Motley Fool owns shares of Costco Wholesale and Starbucks and has the following options: short April 2014 $90 puts on Tupperware Brands. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.